The Skins Game

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"See if you can guess what I am now.....I'm a ZIT! Get it?"--John "Bluto" Blutarsky, Delta House

Good morning and welcome to Blemishville. Yesterday's greasy spoon set the technical table and the acne began to spread. The breakout began in the semiconductor space but, before long, the industrials popped out to join the party. The blistering pace continued to race and the bovine blackheads were squealing like a bunch of excited teenagers! Can Hoofy squeeze the skin for a big time win or will Boo lump the bumps with the rest of the humps? The court jester is about to fester, Minyans, so wash up and settle down--we've got work to do!

As players score on the sandy shore, the world's most discussed trading range is emerging from a long summer slumber. To be sure, the seasonal diet has offered whisper thin conditions but reactive traders aren't picky....they're looking for any morsel of direction. Once the semis snuck out to lead the party, the other averages perked up their plucky pucker. Now, with a few sectors offering upside confirmation, we're left to wonder how high the waves will crest before crashing down.

While the S&P and NDX are still mired in the middle of the range, the industrials have given a clear upside signal. That fact must be weighed against the troublesome writing on the wall of worry. The much maligned VIX, which measures the collectively complacency, is now at levels seen only twice since the height of the bubble. The previous teen screams (August 2000 and April 2002) were imminent precursors to massive declines in the broader averages.

That's not reason in and of itself to abandon ship but it's something to weigh if you decide to stay. The VIX can surely drip lower before snapping back (it's not a timing instrument) but it's a piece of a larger and more disconcerting puzzle. You know the drill by now--insiders are puking stock, valuations are tickling "topping" levels, the bull camp is crowded and the structural underpinnings are suspect. That won't matter until it does...but when it does, it's gonna offer a most unpleasant reminder of the other side of the coin.

I don't mean to bring you down and I'm certainly not telling you what to do. Rather, it's something to factor into your "statistical probability" as we edge forward. There are numerous strategies and stylistic approaches that allow you to capture the upside while protecting your backside. Active Minyans can employ "rolling stops," option traders can set up positive gamma, longer term players can execute stock replacement or buy (cheap) protective puts. My simple message is that, as a function of the dynamic variables, there is more than one way to skin a profit.

I power up today with a rather large "V" staring me in the face. I've got my puts on (ranging from September to January paper) along with some front month calls in sectors that have broken out. As a function of my individual approach, I'll roll up my stops (if the market rallies) and try to capture some of that hay if the sun shines. I respect what the market is telling me and have incorporated that into my risk profile. Still, I remain of the belief that a meaty melt is "out there" and I've been building gamma at these levels of volatility.

The bulls will try to ride the recent breakout mojo and spur the S&P through 1010 (triple top breakout) and 1020 (triple top breakout/yearly high) while nudging the NDX through 1300-1320 (yearly high). If they're to do this, the financials will have to join the party and it better be loud. Volume confirms price and, as it stands, yesterday's clam bake was relatively muted. On the downside, the 50-day moving averages will provide first support at S&P 989 and NDX 1245.

That's about it from the front lines, my friends, so I'm gonna flip lids and tickle ticks. Understand that it's thin out there and there are plenty of agendas in play. Define your risk, when possible, remove emotion and remember that discipline should always trump conviction. The games, as they say, have only just begun.